KEY TAKEAWAYS
- Lawsuits and budget recommendations under President Donald Trump’s administration have made the future of federal student loans uncertain.
- The limbo that student loan borrowers are facing has paved the way for major changes to the federal student loan ecosystem.
- Investopedia asked three student loan experts what the ideal student loan system would look like.
An ongoing lawsuit and new budget framework threaten the existence of some income-driven repayment (IDR) plans, paving the way for major changes to the federal student loan system.
Major shifts in how the government approaches the federal student loan system have occurred in the past two weeks. The latest developments in the lawsuits against the Saving on a Valuable Education (SAVE) plan have called into question the legality of all income-driven repayment plans. The House of Representatives passed a budget proposal on Tuesday that could make a myriad of changes to how borrowers take out, repay and get forgiveness for loans in an effort to cut $330 billion in spending over the next 10 years.
The potential changes could pave the way for major changes to the federal student loan ecosystem, in which 42.7 million Americans hold $1.6 trillion in debt. With the programs in flux, Investopedia asked student loan experts from across ideologies and backgrounds what they would do if they had the opportunity to start the student loan system over from scratch.
Sarah Reber, senior fellow in economic studies at the Brookings Institution; Amy Czulada, outreach and advocacy manager at the Student Borrower Protection Center; and Andrew Gillen, a senior fellow at the Cato Institute provided their thoughts.
Making College Cheaper
All three experts said colleges and universities should be held accountable for their tuition prices and be made to ensure students are getting a good return on their investment.
As college costs rise, students have taken out more loans to afford secondary education. Federal student loan borrowers hold almost twice as much debt than they did 10 years ago.
Gillen suggests naming schools as “co-signatories” on student loans, in which the school would be responsible for any missed payments by their students. This could also prevent schools from raising their tuition, he said.
“If it’s a bad loan, the students hurt, and the government’s hurt because the government never gets repaid, but the school gets to keep all that money,” Gillen said. “You’re basically rewarding schools, even if it doesn’t work out for anybody else, whereas it’s pretty easy to make sure all those incentives align if you have the school on the hook to repay.”
Reber suggested reallocating the subsidies for loan forgiveness to make college more affordable on the front end. Reducing the price before the student pays tuition could increase access to higher education, Reber said.
Simplify Repayment Plans
Student loan borrowers have been in limbo as various repayment plans have been created, paused, or reopened over the past two years.
“Borrowers are experiencing a lot of angst, a lot of confusion about what to do, about what their best options are, and in many cases, maybe there aren’t great options for them,” Czulada said.
Reber’s ideal repayment plan would scrap the different repayment plans and create one universal plan that includes all federal student loan types.
“It would be easier if we had just one repayment plan that was clearly communicated ahead of time, that people understood, and everybody was eligible,” Reber said.
Gillen would also simplify the different repayments by creating two repayment plans that borrowers can choose between.
His default plan would be a traditional plan, with payments determined by the amount of the loans and the interest rates. Borrowers could also choose an income-driven plan or be moved into it if they miss two or three payments. The IDR plan would match monthly payment amounts with the borrowers’ income level until the loan is fully paid off.
Should Forgiveness Be In the Cards?
Student loan forgiveness has been a sticking point in recent discussions about the current federal system. The Supreme Court struck down broad forgiveness in 2023. Ever since, repayment plans and programs that offer forgiveness have been caught in the crosshairs of lawsuits and proposals for regulation changes.
Gillen would not bring back loan forgiveness plans except for special cases such as borrowers with disabilities or those below the poverty line who are enrolled in the IDR plans.
In comparison, Czulada’s ideal system would wipe the slate clean and erase all debt, including private debt. Once erased, she would not bring repayment plans back and instead would ideally make college free for everyone.
“I think we can imagine a much better system that involves people’s right to access education, and that would involve not having student loans at all,” Czulada said.
